As someone who has spent decades battling insurance companies over wrongful claims practices, it might seem strange that I’m writing about the importance of insurance company profits. Trust me, I had to take a deep breath before typing that sentence. But here’s the reality – like that annoying relative who you can’t stand but need to invite to family gatherings, insurance company profitability serves an essential purpose in our society.
Let me be clear – when I see insurers denying valid claims or playing games with policyholders while posting record profits, it makes my blood boil. However, just as a car needs fuel to run (even if the oil companies’ pricing drives us nuts), insurance companies need profits to function effectively and properly.
This topic came to mind while reading Heritage Insurance Company’s press release regarding its third-quarter performance. Heritage’s CEO was spot on point with his message and announcing a successful operating quarter:
‘Our thoughts go out to the many people that were impacted by the devastating hurricanes that affected so many communities across the Southeastern United States.’ remarked Ernie Garateix, Heritage CEO. ‘Our focus has been on providing our policyholders with the support and response that they expect and need as we assist them with their recovery. To accomplish this, we have deployed our resources as well as those of our outsourced providers throughout the affected areas and have participated in numerous insurance hurricane villages, where we meet personally with policyholders to assist with their claims. While the recovery will take time, I am very proud of our employees and their commitment to our policyholders to help them through this challenging time.’
Mr. Garateix continued, ‘While I am proud of the support that we have provided to our policyholders, I am also very proud of our third quarter financial results which clearly demonstrate the successful execution of our strategic initiatives focused on attaining rate adequacy and improving our underlying portfolio. A core objective of our strategy has been to position Heritage to sustain a hurricane loss while maintaining our profitability. I am pleased to note that even with $48.0 million of retained hurricane losses in the quarter, we have achieved this goal, reporting net income of $8.2 million in the third quarter. That said, we have much more to accomplish as we now pivot our strategy to one of controlled growth. I remain very optimistic about the opportunities that lie ahead for our company, employees and shareholders.’
Long-time readers must be wondering, “Chip, isn’t this the same company that you have been critical of in the past, and you must have pending lawsuits where you are saying that they have done something wrong?” The answer is “yes” and “yes.”
Think of it this way: When disaster strikes, we need insurance companies to have financial resources to respond with a sufficient number of people who are motivated and trained to quickly and fully get the money out of the insurance companies’ treasuries and into the pockets of policyholders. Those profits build the financial reserves that ensure claims get paid quickly and fully when the next hurricane decides to redecorate Florida’s coastline. Without adequate surplus, we’d have insurers going belly-up faster than a fish in red tide.
Garateix’ comments were nearly perfect. He first expressed concern for those who were harmed, congratulated those working within the Heritage claims system to help policyholders, and then explained that the company was running well and turning a profit. I cannot find anything wrong with that. Indeed, it is profits that allow insurance companies money to train and motivate claims adjusters with an attitude to fully and quickly pay claims. I hope Heritage is successful in doing so while maintaining profits and providing a great place for its claims adjusters to professionally grow and work.
Profitable insurers can invest in things that actually help policyholders – though sometimes wonder if they remember that’s their job. They can upgrade their claims systems (so there’s one less excuse for delay), improve risk assessment and loss mitigation tools (to hopefully price policies more fairly and reduce future losses), and maintain a presence in challenging markets (instead of running for the hills when things get tough).
Here’s where it gets tricky – and where I spend most of my professional life. While reasonable profits are necessary, using profitability targets or goals in the claims department to justify bad faith claims handling is like saying it’s okay to rob a bank because you need money for groceries. There’s a right way and a wrong way to achieve financial goals.
So yes, I’ll grudgingly admit that insurance company profits matter, and I hope that insurance companies are making profits and growing. It is important for all of us that they do. But – and this is a big but – those profits should come from efficient operations, smart underwriting, and prudent investment of premiums. They should never come from wrongfully denied claims, delayed payments, or taking advantage of policyholders in their time of need.
Think of it as a marriage – we need insurance companies to be financially healthy, but that doesn’t give them the right to be unfaithful to their promises. When they break their vows to policyholders, you’ll still find me in court, fighting for justice. Because while profits are important, principles matter more.
And that’s the paradox of insurance company profitability: we need it, but we must never let it become an excuse for bad behavior.
Now, if you’ll excuse me, I have some clients with claim denials and underpayments, which I must tend to.
Thought For The Day
You never really understand a person until you consider things from his point of view.
—Harper Lee
